In mid-July, Amar Kuchinad, a former Goldman Sachs Group Inc. banker turned bond entrepreneur, was sporting a thick beard. He refused to shave, he said, until his new company, Electronifie Inc., turned a profit.
As Electronifie competed among the dozen or more new electronic bond-trading systems to come on the scene in the last year, Kuchinad’s beard was growing conspicuously bushy. The new trading venues face the unenviable challenge of changing the behavior of bankers and investors who for decades have bought and sold corporate bonds over the telephone or by instant message.
“If this were easy it would already be done and all of us would still be working at our very cushy jobs on Wall Street,” Kuchinad said in an interview at Electronifie’s offices in New York. “How do you facilitate that change in behavior with as little impact as possible?” he said. “It’s very difficult.”
Finding new ways to trade corporate bonds has gained fresh urgency as investors, bankers and regulators fret over the ease of trading -- known as liquidity -- in the $8 trillion market for U.S. corporate debt. New trading platforms hope to improve liquidity by better matching buyers with sellers, but there remains a huge disagreement in the market over how best to accomplish this. Newcomers have to walk a fine line between encouraging fresh ways of doing things without alienating existing market participants.
The difficulty is underscored by the recent failure of Bondcube, a trading platform founded by former Citigroup Inc. trader Paul Reynolds, which shuttered its electronic debt-trading effort after only three months. New ventures have to contend with the unchanging fact that relatively few bonds trade per day compared with equity or futures markets, and phone trading has served that low-liquidity environment well for decades.
“Nothing has fundamentally changed in the fixed-income market,” said Will Rhode, global head of capital markets research at Boston Consulting Group. “So far I haven’t seen behavior change or that there’s any kind of new mousetrap out there to solve this.”
The rush to put bond trading on computer screens stems partially from changes in bank capital requirements that are meant to make them safer after the 2008 financial crisis. Whereas prior to the crisis banks could warehouse debt until a customer came asking for it, that’s now too expensive and may violate the Volcker Rule. Both changes have made it more difficult for investors to buy or sell corporate debt, and many of the new trading venues aim to encourage greater participation from investors who now hold large portfolios of the bonds.
Besides Electronifie and Bondcube, other companies that have started offering computerized corporate-bond trading within the last year include TruMid Financial LLC and Liquidnet Holdings Inc. Tradeweb Markets LLC, owned by Thomson Reuters Corp. and a group of Wall Street banks, launched its own corporate bond trading venue with much fanfare last year.
There have also been attempts by Goldman Sachs and BlackRock Inc. to change how trading takes place, as well as a slew of bank-led consortiums with names like Oasis and Neptune. (Bloomberg LP, the parent of this news organization, also has a platform for trading corporate bonds.)
MarketAxess Holdings Inc., which got its start in 2000, is a market leader, and dominates in smaller trades, those valued at less than $2 million.
Electronifie, which is focused on larger transactions of investment-grade and high-yield debt, currently attracts about 45 institutional-sized orders, worth about $200 million, per day from the 40 firms signed up on its platform. About $8 million of bond trades get executed daily, Kuchinad said.
To put that into perspective, more than 6,200 bonds traded per day on average in 2014, according to data from the Financial Industry Regulatory Authority’s Trace price-reporting service.
Tradeweb began offering corporate bond trading in October, letting users receive streaming prices, enter lists of bonds they wanted to buy or sell, or participate in electronic auctions. The company is averaging between 30 to 50 trades a day in its list service with an average size of $2 million, Billy Hult, president of Tradeweb, said in an interview.
Volume doubled in the second quarter from the first, and more than $1.1 billion of trading occurred in June, he said.
There have been problems, too. The company is seeing most of its growth from users entering a list of bonds to buy or sell, which mimics the way MarketAxess works, and hasn’t succeeded in its offer of streaming prices for bonds of more than $2 million, according to a person with direct knowledge of the matter, who asked not to be identified because the information is private.
Some market participants expressed surprise that a platform backed by banks that have long dominated bond trading hasn’t been more successful.
“We face a familiar challenge in progressively transforming trading behavior and the operational workflow in U.S. credit,” Hult said. “We know from experience that it’s going to take a long time, but we’re committed to supporting a competitive, effective offering until the market moves electronic.”
At TruMid, the idea is to encourage trading in pre-selected bonds to create a market price that others can then use to buy or sell the debt through the company’s system. Since beginning on April 29, the firm has averaged a few dozen trades a day that are above the minimum $2 million threshold, said managing partner Mike Sobel.
On average, $1 billion in orders per day has resulted in a total traded amount in the low single-digit billions of dollars since April 29, he said. He declined to be more specific.
“We’re pleased with the progress we’ve made in the few short months since we’ve launched,” Sobel said. TruMid now has 150 clients signed up, more than double the 70 they started with in April, and several hundred more are in the process of joining, Sobel said.
“Electronic trading will be an increasingly important part of credit market liquidity,” he said.
Liquidnet, best known for its equity dark pool, expanded into bond trading last year with its purchase of Vega-Chi Ltd., which introduced a limit order book for bonds in 2012. That style of trading, which involves firm prices that users can trade against with a click of a mouse, has been deemphasized, said Constantinos Antoniades, Liquidnet’s head of fixed income.
“The big event is the late September dark pool launch,” he said. A combination of already knowing and being connected to asset managers from its equities dark pool and investment in data to aid pre-trade transparency and execution will help the new venture, he said.
“I’m very confident we have the best product with the best protocols out there that’s very different” from competitors, he said. He declined to give trading volume on Liquidnet.
Earlier this month, MarketAxess reported record trading volume of $245 billion in the second quarter, up 32 percent from a year earlier. The firm’s Open Trading system, where investors can transact with each other without a bank’s involvement, saw trades double to 38,000 with volume of $21 billion, Chief Executive Officer Rick McVey said on an earnings conference call.
Getting big investors to participate in the platforms and provide prices is key, but progress on that front can still be slow, McVey said in an interview.
“The reality is the dealers’ ability to provide liquidity is not what it used to be, and at the same time the corporate bond market is much larger and the assets are with the buyside,” he said.
“Investors will all say passionately how much they need new sources of liquidity, but we see on our platform that many of their funds are not fully participating,” McVey said. “About 25 percent of them are actively leading with a price in our open order book. We think they’re all going to get there, but it won’t come overnight.”
That slow progress can be a challenge for new entrants, he added. “What many of the new platforms underestimate is the time and money that is involved in really building out the client connectivity and the network to be successful in e-trading for credit,” he said.
No doubt, the founders behind the crop of new bond trading platforms, such as Electronifie’s Kuchinad, are learning this first hand. By late-July, Kuchinad had given in and gone clean-shaven. He joked that he hoped his new look would encourage more participants onto the platform.